20070601final_order_no_30333.pdf

Office of the Secretary
Service Date
June 1, 2007
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR AN
ACCOUNTING ORDER CLARIFYING THE
ACCOUNTING FOR FUTURE PENSION
OBLIGATIONS ORDER NO. 30333
CASE NO. IPC-07-
On March 20, 2007, Idaho Power Company filed an Application seeking an
accounting order to clarify the accounting for future pension obligations. On March 29, 2007
the Commission issued a Notice of Application and Notice of Modified Procedure with a
comment deadline of April 19, 2007. Commission Staff filed comments partially agreeing with
and partially opposing the Company s Application. No other party filed comments. On May 2
2007, the Company filed reply comments. With this Order the Commission clarifies the
accounting for future pension obligations as more fully stated below.
THE APPLICATION
Idaho Power s Application seeks an accounting order authorizing it to: (1) change
from accrual to cash accounting to determine future contributions to defined benefit pension
plans; and (2) defer future defined benefit pension plan contributions and record them as
regulatory assets with ratemaking treatment of such regulatory assets to be determined in
subsequent revenue requirement proceedings. The Company stated that it is not requesting
current approval of future ratemaking treatment of deferred expenses associated with the
Company s defined benefit pension plans, but is only requesting authority to implement
regulatory accounting practices.
Idaho Power accounts for defined benefit pension expense in accordance with
Statement of Financial Accounting Standards 87 (SF AS/F AS 87). The Company stated that in
its 2003 general rate case, IPC-03-, the Commission did not allow the accrued SFAS 87
amount to be included in the Company s revenue requirement; however, the Commission did not
direct the Company to change to a cash method to account for defined benefit pension expense.
Additionally, the Company refers to Case No. UWI-04-04 where United Water utilized the
SF AS 87 accrual methodology, and the Commission determined that using actual cash
contributions, not accrued obligations, was the appropriate way to determine the amount to
recover in rates for the defined benefit pension expense.
ORDER NO. 30333
STAFF COMMENTS
Commission Staff reviewed the Company s Application, the accompanYIng
testimony of Lori Smith, as well as previous Commission Orders referenced in the Company
Application. Staff comments reviewed additional background regarding the Company
treatment of pension expense, as well as the present Application and Staff concerns. Staff
recommended that the Commission approve that portion of the Company s request which would
allow the Company to capitalize the annual SF AS 87 pension expense as a regulatory asset, thus
removing it from the Company s income statement. However, Staff opposed and recommended
that the Commission deny the Company s request to defer future cash contributions. Staff
recommended that the cash contributions be used to offset the regulatory asset created by the
capitalization of SF AS 87.
Staff stated that the impact of the Company s proposal would be to remove the SF
87 pension expense from its income statement resulting in improved earnings and capitalization
ratios. The method in which the Company proposed to remove the SF AS 87 pension expense
from its income statement is to defer the expense and report it as a regulatory asset on its balance
sheet.
SF AS 71 provides that before costs which would otherwise be expensed can be
capitalized or deferred, it must be probable that the regulating entity will allow recovery of
prudently incurred amounts in future rates. Staff stated that over the life of a pension plan, the
amount of SF AS 87 pension expense and the amount of cash contributions are theoretically
equivalent and, without interference, the SF AS 87 expense and the cash contributions over time
will be comparable. Therefore, to address Staff s concerns about SF AS 71 , Staff believed it
would be permittable to allow the deferral of SF AS 87 pension expense as a regulatory asset if
the cash contributions when made are credited as an offsetting entry to that regulatory asset.
Given the presumption that the two expenses will ultimately be equivalent and the regulatory
asset account will zero out on its own, then the SF AS 71 requirements will be satisfied.
Staff recommended that the Commission allow the Company to capitalize the annual
SF AS 87 pension expense by creating a regulatory asset, with the cash contributions used to
offset that regulatory asset. Staff recommended denial of the Company s request to defer future
cash contributions. Under Staffs proposal, the regulatory asset should not be amortized to
customers; instead it would balance over time through journal entries. Staff also recommended
ORDER NO. 30333
that the Commission deny carrying charges on the regulatory asset, and that the ratemaking
treatment and recovery of actual pension expense be determined at a later date, presumably when
the Company is required to contribute to the plan again.
THE COMPANY'S RESPONSE
On May 2, 2007, the Company filed reply comments that, among other things
identified from the Company s perspective where the Staff and the Company agreed and
disagreed regarding the Company s Application. The Company stated that it appeared that both
Staff and the Company agreed that removal of the accrued SF AS 87 pension expense from the
income statement is desirable and can be accomplished by taking the steps required by SF AS 71
to properly qualify the accrued expense as a regulatory asset. However, the Company stated that
Staffs proposed accounting procedure would not accomplish its intended purpose. The
Company asked the Commission to adopt some specific language in the Order for this matter
that would allow the Company to satisfy SF AS 71 requirements and provide the customer
benefits described in Staff comments. Subsequently, Staff and the Company were able to agree
upon some language acceptable to both parties that was proposed to the Commission.
FINDINGS/CONCLUSIONS
The Idaho Public Utilities Commission has jurisdiction over Idaho Power Company,
its Application seeking an accounting order to clarify the accounting for future pension
obligations, and the issues involved in this case by virtue of Title 61 , Idaho Code, including
Idaho Code ~~ 61-129, 61-301 , 302, 303 , 61-502, 61-503 , and 61-524 and the Commission
Rules of Procedure, ID AP A 31. 01. 0 1. 000 et seq. The Commission continues to find that the
public interest may not require a hearing to consider the issues presented in this case, and that
issues raised by the Company s filing may be processed by Modified Procedure, i., by written
submission rather than by hearing. IDAPA 31.01.01.201-204. In so doing, the Commission
notes that Modified Procedure and written comments have proven to be an effective means for
obtaining public input and participation.
Idaho Power Company requests an accounting order authorizing the Company to (1)
account for pension expense on a cash basis and (2) authorizing the Company to defer the
expense associated with the pension plan cash contributions and record them as a regulatory
asset with actual ratemaking of such regulatory assets to be determined in subsequent revenue
ORDER NO. 30333
requirement proceedings.We find this request to be reasonable as a clarification of the
accounting treatment for pension expense.
The Pension Protection Act of 2006 reVises the calculation of the Employee
Retirement Income Security Act (ERISA) minimum funding requirement, increases the
maximum tax deductible contribution employers can make and places certain restrictions on
significantly under-funded plans. Within this proceeding the Company and Staff agreed that
allowing the Company to defer accrued SF AS 87 expense and thereby removing the SF AS 87
pension expense from the Company s income statement is reasonable and is properly recorded as
a regulatory asset under SF AS 71. The Commission finds this approach to be reasonable and
consistent with prior Orders. The Company and Staff also acknowledged that over the lifespan
of the Company s defined benefit pension program, accrued SFAS pension expense would match
cash contributions. Cash contributions will reduce the deferred regulatory asset. We find that
consistent with prior Commission Orders, the ERISA minimum funding requirement made as a
cash contribution may be properly included in the Company s revenue requirement. Any
additional cash contributions above the minimum should be evaluated on a case-by-case basis to
determine the proper regulatory treatment. This treatment meets the requirements of SF AS 71 to
defer these expenses as it is probable that the regulating entity will allow recovery of prudently
incurred amounts in future rates. As stated in the Company s Application and Staff comments
we find that the proper ratemaking treatment of such regulatory assets should be determined in
subsequent proceedings. When the Company s actuaries notify the Company of ERISA
minimum funding requirements, the Company can evaluate the circumstances for ratemaking
purposes and make a filing requesting ratemaking treatment, if needed.
ORDER
IT IS HEREBY ORDERED that Idaho Power Company is authorized to account for
its defined benefit pension expense on a cash basis, and to defer and account for accrued SF
87 pension expense as a regulatory asset. The Company has acknowledged it will not request a
carrying charge be applied to the deferral of the SF AS 87 balance nor will it request amortization
for the SFAS 87 regulatory asset created. We acknowledge that it is appropriate for the
Company to seek recovery in the Company s revenue requirement of reasonable and prudently
incurred pension expense based on actual cash contributions.
ORDER NO. 30333
THIS IS A FINAL ORDER. Any person interested in this Order may petition for
reconsideration within twenty-one (21) days of the service date of this Order with regard to any
matter decided in this Order. Within seven (7) days after any person has petitioned for
reconsideration, any other person may cross-petition for reconsideration. See Idaho Code ~ 61-
626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
/:sf'
day of June 2007.
MARSHA H. SMITH, COMMISSIONER
ATTEST:
ill /1e D. Jewell
Commission Secretary
O:IPC-O7-07 dw2
ORDER NO. 30333